Thursday, July 13, 2017

Ray of hope update

One remaining debate is over Ted Cruz’s “freedom option.” The Texas Senator’s amendment says that any insurer that offers at least one ObamaCare-compliant plan could also sell other types of coverage off the exchanges. The expectation is that a more competitive and dynamic insurance market will emerge outside of ObamaCare. Released from federal mandates and price controls, insurers could offer many more innovative products designed for individuals, rather than standardized coverage planned in Washington.

Mr. Cruz acknowledges that insurance markets could “segment,” meaning that younger and healthier people would gravitate to the Cruz option, where premiums are likely to be much cheaper. Older people with more health expenses would remain on ObamaCare, which bars insurers from charging higher premiums based on health risks and bans exclusions for pre-existing conditions.

The logic of the Cruz proposal is that there is a rough consensus among Republicans that government should guarantee access to coverage for people with pre-existing conditions. In that case, government should pay for this guarantee, in the form of a de facto high-risk insurance pool, rather than hiding the cost in cross-subsidies imposed on private citizens.

The virtue of this approach is transparency and honesty. In a bifurcated market, premiums would be much higher for ObamaCare plans. But they’d be offset for consumers by much higher federal subsidies that rise with premiums...

So, the solution envisioned yesterday could actually emerge. The exchanges become what they already are -- places to get subsidies. Where you go to sign up for medicare, income-based premium subsidies, and so on. [The "rough consensus" really is not all that much about preexisting conditions. It is about subsidies based on income and age.] The rest of the market can be free.

It's not perfect. If we "bifurcate," just why should insurance companies have to offer an exchange policy? You can smell a cross subsidy from off exchange to on-exchange already, together with restrictions on competition to enforce that cross subsidy.

Will the off exchange policies offer guaranteed renewability, portability from state to state, and portability into and out of employment? Not yet, I think, but that's where they need to go.

The WSJ emphasizes preexisting conditions, but let's make a distinction between people with preexisting conditions right now, the day after Obamacare destroyed the individual market, and people who get conditions next year that become preexisting the year after that.

If the point of exchanges is to be high risk pools forever, for anyone who in the future develops a preexisting condition as the WSJ seems to envision, then Sen. Cruz free market idea will be very weak. It will offer people one year worth of cheap insurance, and then the minute anyone gets actually sick they transition to subsidized insurance.

The combination of free market and exchange has to be designed to keep people out of the exchanges. The previous limits on signing up for people who, starting a year from now, do not have continuous coverage, go a step in that direction. You want people to buy health insurance not so much for this year's expenses, but for the right to be covered next year if they develop a preexisting condition, and then to stay with their individual policies.

Yes, people who have preexisting conditions now cannot jump in to the market, because the market doesn't exist. But that does not mean that subsidized exchanges should forever be an absorbing state for anyone who gets sick or old. Which is all of us.

Still, the outlines of subsidies for those who need them, and freedom for the rest of us, seems to be on the table.

Update:

Or maybe not. Mike Cannon writes there will be price controls on the "free" market alternative, linking them to exchange policies. Together with a requirement to offer exchange policies, this looks just like a small broadening of exchange policies, cross subsidies intact. Since the exchange policies are specific to counties, I can't see how this is portable across even county lines, let alone state lines, guaranteed renewable, and so forth.

10 comments:

There is something that I don't get about cost-control mechanisms involving catastrophic healthcare insurance. Here's a parallel with car insurance to clarify my question.

For routine care, I figure that they work the same: we pay for checkups and shots the same way we pay for inspections and oil changes.

Likewise, for accident/injury/disease involving repair/care costs lower than the deductible, they work the same way.

But it seems that they work quite differently for larger claims:

-Car insurance: the insurance adjuster typically evaluates how much the repair will cost. Then the customer is offered two choices. (A) Take the car to a shop that is affiliated ("in-network") with the insurer and the insurer pays the whole bill, or (B) receive a fixed payment from the insurer (then do the repairs yourself, go to another shop or just don't do the repairs). This way, the customer has an incentive to keep costs low. The insurer also negotiates with "in-network" shops to keep costs low.

-Health insurance: the customer goes directly to a healthcare provider when necessary. Whatever the customer needs is paid for by the insurer. The adjuster goes through the paperwork well after the care is provided. The insurer can still negotiate with care providers to keep them in-network, similarly to car insurance. But there is no option where a fixed payment is sent to the customer when he or she becomes ill or injured. Also, out-of-network costs are sometimes fully reimbursed, once a certain out-of-pocket amount has been met. Cost controls mechanisms simply are not as strong.

BTW, these higher-than-deductible expenses constitute the bulk of healthcare spending. 50% of healthcare spending is to care for customers with individual annual care costs larger than 15k$ (i.e. 5% of the population).

It seems to me like a major cost-control mechanism is missing from private healthcare insurance, compared to auto or property insurance.

I Believe a significant difference between car insurance and health insurance is that you would not spend more than the cost of a new car to repair any damage. there is no such limit established for medical conditions for humans.

I would think that in general a more standardized market (think stocks or commodities) is more efficient and competitive than a non-standardized market.

If we want providers to compete, isn't it beneficial to encourage standardization? Doesn't this allow consumers to comparison shop more easily?

If every insurer provides a different product, comparison shopping becomes extremely difficult I would think. Of course it's a matter of degree, cars are not entirely fungible either, but they are fungible in their basic function.

Are insurance policies similar enough to cars that we don't need to encourage standardization in order to get a properly competitive market? I am not entirely sure to be honest, but I would not consider it obvious.

I get that "freedom for the rest of us" is important and that private markets in place of government is important. What I don't get is being content with the prospect of living in a society filling up with the destitute, or an unwillingness to consider the possibility of that being the cost of holding the priors inviolate.

Cross subsidies, and consequent ban on competition, pervades the supply of health care services as well. As you note, we're all talking about who pays the bill, as if there were cutthroat competitive suppliers providing the service. The real problem of US health care is lack of supply competition, not who pays the bill.

Question 1)How many healthy individuals are required to subsidize with premiums a single patient with a chronic disease for a period of 5 to 10 years of illness? The whole premise of property insurance is that the event is 0-1. You are either ill and you die or you are ill and cured. It used to work before the advancements in medicine which turned incurable diseases to chronic diseases. The transformation of health insurance from property-type to casualty-type which can never be correctly priced, is the source of the problems.

Question 2)Based on the above answer are we certain that chronic disease, which kills insurers, can be insured in private markets? My feeling is that chronic disease is uninsurable unless one is willing to accept severe restrictions such as exclusion of existing conditions.

Question 3)Cost side. How long does it take to amortize the cost of medical education? Why aren't the US importing liberally foreign trained doctors to reduce the costs at source?

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About Me and This Blog

This is a blog of news, views, and commentary, from a humorous free-market point of view. After one too many rants at the dinner table, my kids called me "the grumpy economist," and hence this blog and its title.
In real life I'm a Senior Fellow of the Hoover Institution at Stanford. I was formerly a professor at the University of Chicago Booth School of Business. I'm also an adjunct scholar of the Cato Institute. I'm not really grumpy by the way!